The importance of keeping a balanced innovation portfolio

Posted On 4th May 2020

Every new ground-breaking product and service, in the end, will become obsolete, commoditized and outcompeted by new and better solutions, products and companies; maybe best epitomized by Kodak. Ones an icon of American technology innovation but slow to react to the digital revolution, the company ended its 100-year history in 2012 declaring bankrupt with $6.8 billion in debt.

So how did one of the world’s most profitable and bellowed companies in less than ten years going from being a stock-market wonderchild to bankruptcy? The main reason according to Bloomberg was the fact the organisation relied too heavy on old innovations and revenue streams, failing to build an innovation pipeline with products and processes adapted to the new digital revolution.

What the many “to-large-to-fail” giants which in the last decade have declared bankrupt show (Blockbuster, Toys R Us and Kodak just no name a few), is that to survive in today’s fast-moving markets companies cannot rely on old inventions, but need to envisage the future and invent things for markets that do not yet exist, and maybe most importantly also to keep a balanced portfolio of innovations which will secure market positions, revenue streams and profits: today, tomorrow and in the future.

The importance of innovation portfolios

The last two decades have seen a dramatic reduction of product life-cycles with 50% of annual company revenues, on average, now being derived from product launches within the past three years and with many industries now replacing product or service lines every two years 3,4.

To secure healthy revenue streams and long-term survival organisations, therefore, need to have a balanced portfolio of innovation projects covering horizons of time short, mid and long-term.

The primary purposes for organizations to keep a balanced innovation portfolio are:

1. To secure the long-term survival of the organisation

2. To manage risk inherent in innovation initiatives while optimizing the results achieved by related investments

The benefits of a balanced innovation portfolio include7:

Steady, long-term and above-average returns which according to Harvard Business Review only can be achieved through a well-balanced innovation portfolio (Fig 1, below).

Companies allocating 70% of their innovation activity to core initiatives, 20% to adjacent and 10% to transformational typically outperform their peers with a P/E premium of 10% to 20%.

Ground-breaking technology innovations usually take 20 years or more from inception to commercial viability (Fig 2, below) and as such organisations need to diversify and adapt their innovation portfolios to reflect this time horizon.

The concept of value innovation

The conventional idea of business tactics that companies only can compete only by cost advantage or differentiation have in recent years lost a lot of its ground to a new idiom of business strategic thinking named ‘Value Innovation’ in which businesses simultaneously pursuit differentiation and low cost which also is the cornerstone of a strategy called “Blue Ocean,” developed by W. Chan Kim and Renee Mauborgne, presented in their perennial bestseller with the same name .

Blue Ocean is about breaking out of the competition by creating new uncontested marketspaces instead of competing heads-on with a low price or incremental product innovations in crowded marketspaces (Fig 3, below):

Some of the main focus points of the Blue Ocean strategy model include:

Processes to make competition within an industry irrelevant by reconstructing industry boundaries and creating un-contested market spaces.

Systematic tools to assess the current state of play in an industry and to convert non-customers to customers; in addition to providing a defined process for implementation.

Robust mechanisms to mitigate risks and to increase the odds of success.

The landscape of innovation frameworks

While the Blue Ocean Strategy has become one of the most acclaimed theories and frameworks of the new school of innovation, there has been an incredible amount of research in this area both in the academia and in the business-world resulting in a number of models for innovation including: The Lean Start-up11, Claytons Theory of Disruptive innovation12, The Three Horizons Framework13, Ten Types of Innovation14, Porters Five Forces15 and Design Thinking16.

Apendix 1 and 2, below presents three of these frameworks in more detail

There is no such thing as a universal model of business

Every project and team bring unique challenges, needs and demands which might not fit within the dynamics of a specific innovation framework, and all frameworks also have their own crowd of dogmatic critiques and supporters; especially true among the Blue Ocean versus Five Forces followers whom often neglect research showing that a combination of both schools, in fact, often yields the strongest outcomes17. The wisdom from this is that business leaders do best by learning about a few different innovation frameworks to enable informed decisions when choosing a model for their innovation initiatives.

Get the right talent

While the landscape of innovation frameworks, and its proponents, is diverged in which methods and strategies that most efficiently solve the innovation dilemma most literature, regardless of model, emphasize that the key to success is to build the right talent:

Innovating for tomorrow versus initiatives with a time horizon maybe ten or twenty years in the future demands very different skills18. To succeed with building a balanced innovation portfolio it is therefore important to build team structures reflecting each phase of the “nose of innovation.”

Innovation teams should be staffed with people that represent different stakeholders and interests in the organization19.

Innovation teams should have one or a few influential “champions” with the ability to
convince all members of the organizations to get on-board.20

It is vital to bring in highly talented outsiders that will look on innovation projects without the lens of the organization.21

The importance of metrics

Innovation initiatives always should have stated OKRs and KPIs to determine and explain if and how an investing deliver according to plan which also lies at the heart of the ‘Management by Objective’ (MBO) principle launched by Peter Drucker in his 1954 seminal ‘The Practice of Management’ 22 23. While KPIs for standard business operations often has an economic focus, though, the Ten Types-framework15 proposes that innovation metrics should compose a balanced set of measurements over four dimensions; looking back, looking ahead, external and internal with at least one measure for each dimension 24.

Figure 4, below, presents useful innovation metrics for each of these dimensions:

The importance of sanctioned leadership

Organizational change always needs to be systematically organized, require sustained investments (money, people, time)25 and also need to be sanctioned by the executive suite which is well summarized in organizational expert Jim Hemerling’s model of organizational change 26; Fig 5, below:

Leading literature of corporate innovation also lists critical key-points to succeed with corporate innovation:

Successful implementation of corporate innovation always need managerial coordination throughout all levels of the organization.

Leadership of corporate innovation is about unlocking the creative potential of the organisation and setting up conditions to generate, embrace and execute new ideas.

Unless there are genuine rewards for taking risks and putting forward new ideas people within an organisation rarely embrace innovation initiatives. As such it is important for leaders to recognizing peoples efforts through extrinsic and intrinsic rewards.

Conclussions

To ensure steady profits long-term and to secure long-term profits and survival for the organisation need to build an innovation portfolio with a balanced mix of projects with a short, mid and long-term time horizon.

A number of innovation frameworks exist providing business leaders a systematic approach to innovation and to enable informed decisions when deciding for a suitable model for innovation initiatives business leaders therefore need to learn about a few.

Building the right talent is a key to succeed with strategic innovation and team structures needs to reflect the difference needs of short, mid and long-term projects; such as market researchers for short and mid-term initiatives while strong talent in cultural studies for long-term initiatives. It is also important to get buy-in from everyone and to bring in highly talented outsiders that will look on the project with fresh eyes and without the lens of the organization.

Innovation initiatives always should be should have stated objectives and key-results grounded the organisations short- and long-term goals, in addition to linked KPIs enabling ongoing monitoring and reviews that investments and business operations meet their strategic and operational goals.

Organizational change needs to be systematically organized and require sustained investments. Leaders also need to reward risk-taking, recognize peoples efforts. And setting up conditions to generate, embrace and execute new ideas